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Trade Unions played an essential role for the working man and woman. They helped improve working and living conditions for millions of people. First, by providing collective insurances that assured families a small income if the breadwinner passed away. Later, by collectively bargaining for higher wages and better working conditions. They stood at the base of the modern middle class.

But today, the role of trade unions has grown smaller. In the United States, the percentage of unionized workers has plummeted from 35 percent in the 1950’s to around 10 percent now. A similar trend can be seen in the chart below, where the union membership of some European countries and the US is plotted. The trend is clear: workers are turning their backs to trade unions.

Trade Union Density as a percentage of the workforce. DATA SOURCE: OECD. The exception to the downward trend in Europe seems to be Scandinavia. Here, union membership has maintained stable at levels of 50 percent (Norway) and just below 70 percent (Finland, Denmark and Sweden). These high and relatively stable numbers are correlated with the historical good protection for workers in Scandinavian countries.

 

And it’s not just workers turning their backs to trade unions. Economists are also very dismissive of them, branding them disruptive. Take the minimum wage, one of trade unions’ major accomplishments. This is effectively a price control which decreases demand on the labor market, increasing joblessness. Trade unions are also bad for the competitive power of an economy, pushing wages to levels higher than affordable for many corporations. To many economists, trade unions are merely seen as the reason more people are unemployed than necessary.

But the positive economic effects of trade unions are not often recognized. They are much needed for a healthy labor market and a well-functioning economy. In this article, I will explain the negative effects of the declining influence of labor unions. For this, I will look at recent empirical research on the effects of the decline of organized labour.

Stagnating Wages

Average wages in the Western world have stagnated since the early 1980’s. As economist Thomas Piketty has pointed out, wealth inequality has grown and owning capital now yields more than working. Even now GDP is growing in most countries and there are shortages in employees, real in most of the Western world haven’t risen much. This fits in a trend that started in the 1970’s.

The growing discrepancy between real wages and productivity in the US. GRAPH SOURCE: Economic Policy Institute.

 

As economist Jared Bernstein points out, wage growth exists, but only nominally. When adjusted for inflation, employees often see no effect on their pay. In the US, real wages have declined by 0.3% in the last year. This is especially remarkable since unemployment is breaking record low’s, which means the demand for labor is exceeding the supply.

And this doesn’t just happen in the US. The OECD (an economic organization for the industrialized world) has shown its worries about the slow growth in real wages in its member countries. While the average real GDP growth in 2018 in OECD member-countries is predicted to be 2.55%, real wages only grow by about 0.5%.

The OECD also points out that stagnating wages affect lower paid workers more than highly paid workers. Employees who are better paid tend to be more mobile, which means they’re less bound to their current employer. They ,therefore, can more easily switch companies when they’re unsatisfied. This gives them a stronger bargaining position. Lower paid employees are more often bound to the employers in their region.

Power imbalances

There are multiple possible explanations for these stagnating wages. One of the major ones is the decline of influence for trade unions in the wage-setting process. In particular, the power imbalance that has emerged as the influence of organized labor declined. The Classical economic theory states that there is no such thing as a power imbalance in a competitive labor market since the laborer can just go to another supplier of labour when treated poorly. The worker is not dependent of the employer, which creates an efficient equilibrium wage on the labor market. The Reality, however, is a lot less simple.

In his speech for the Jackson Hole Economic Symposium (a gathering of the world’s central bankers and leading experts in monetary policy), Economist Alan Krueger of Princeton University stated that the growing power of corporations in the labor market pushes wages down. This is because corporations collude to keep wages lower than the actual added value of the employee.

But corporations aren’t allowed to collude. That is why the collusion is implicit, this is called ‘tacit collusion’. As long as our competitors don’t increase wages, we won’t either. The knowledge that employers do this is as old as the economics science itself, even Adam Smith wrote about it.

Having less suppliers or demanders in a market makes it easier to collude, since there are less players to adjust your actions to. Empirical evidence shows that in markets with less employers, the wages are indeed lower. As mentioned before, lower paid employees experience this the most. Often, there are only one or a few major firms where a large proportion of the population works. This leaves these employees no choice but to accept, since moving for a lower-paid job is often not an option.

For a long time, trade unions were a counterbalance to this tacit collusion. They allowed workers to bargain collectively for their wages. You might say that this makes the union a kind of monopolist on segments of the labor market, since they control all the supply. Yet still, this is a mere counterweight to the demand side of the labor market. Since employers are tacitly colluding, they are effectively creating a monopsony (a market with just one buyer.) Trade unions thus create something of a level playing field.

And it’s not just power imbalances in the labor market, but also in the general political arena. Trade unions are also effective lobbyists for policies that benefit working people in general. This means that they use their political influence to push tax reductions for lower-paid employees or increase their benefits. In this way, they counterbalance the lobbyists from the corporate world that advocate corporation taxes and taxes on capital.

As a result of the diminishing influence of trade unions, changes in taxes have been curbed towards the owners of capital and those who already earn more. Take for instance the recent tax reductions implemented by the Trump administration which disproportionately benefit the wealthy. The current Dutch government will abolish the dividend tax, after fierce lobbying by Shell and Unilever. This is a tax that is primarily levied on foreign investors, and it costs the Dutch government 2 billion a year. This all shows the diminishing political influence of trade unions, which typically push tax reductions for lower paid employees.

Changes in labour shares in G20 countries (plus Spain) (1970-2014). GRAPH SOURCE: OECD

You might wonder, if the wage share of income is diminishing in corporations, where is the money going? The answer is simple, to those who have gained power: corporations and the people who own them. This is seen in this graph. The share of GDP that flows towards wages has decreased in these Western countries, Japan and South Korea.

And it is not like corporations don’t have the means to increase wages. Especially large companies are swimming in cash right now due to the current worldwide GDP growth. But instead using this cash to increase wages, it is used to buy back stocks. Goldman Sachs estimated that this year corporations will buy back 1000 billion dollars in their own stock, an increase of 47 percent from last year. This way, economic growth is used to boost the value of financial assets, and not the purchasing power of workers.

The need for stronger trade unions can be summarized in an economic and a moral argument. Economically, trade unions combat inequality. This has all kinds of negative effects, like  social effects, more volatile financial markets and inequities in (economic) power (a subject that deserves a whole library of research on its own). Morally, we should ask ourselves if it’s fair that workers increase their production but that they don’t get the benefits of it. The proceeds of economic growth flows primarily towards those who own, not those who produce. Trade unions have the potential to equalize these inequalities (again.)